The federal government's next budget will in principle focus on growth, targeting certain sectors of the economy and stimulating innovation, if the recommendations of a group of experts to Canada's finance minister are to be believed.
Although growth and innovation are always welcome, there is nonetheless a right way and a wrong way to promote them. The right way is to allow companies themselves to invest, and to ensure the rules of the game are fair to all sectors of the economy. Aeronautics, mining, agriculture, energy, life sciences, manufacturing, services, and so on, must all be on equal footing.
Growth and innovation are, of course, very laudable goals. It is thanks to growth and innovation, for instance, that life expectancy has gone from around 35 years in the early 1800s to over 80 years today.
Just since the 1950s, Canadians have gained a dozen years of life. Grandparents tend to live longer and get to see their grandchildren grow up.
What has happened? Simply put, we receive better care right from birth, and it lasts throughout our lives. Infant mortality has fallen, and treatments for cardiovascular diseases, cancers and diabetes have improved. We can live with or even cure diseases that were death sentences a generation or two ago.
This is not just a matter of chance, but the result of innovation, which has given us access to better treatments and drugs, and of growth, which has given us the means to afford them.
It is also thanks to growth and innovation that our standard of living has increased so dramatically over the same period, to the point that statistics have difficulty measuring it.
The precise figure itself is not that important; what matters is that parents see their children living better and more comfortably than they themselves lived. But it gives us an idea of the effect of innovation and growth on our lives, beyond their strictly "economic" impact.
When governments get involved
Having said this, when governments try to actively create growth by supporting certain projects rather than others, or by investing public funds instead of letting companies invest and innovate, they can have the opposite effect. There are several reasons for this.
For one thing, it is impossible to predict the future. Certain companies will unfortunately invest in research and development for several years without any big breakthroughs. This is why we need innovation and growth policies that provide a level playing field for all companies and economic sectors, and that do not favour in advance potential losers to the detriment of eventual winners.
Even when the government does not choose winners and losers, it can be tempted to stimulate growth and innovation by itself investing. Even though it's hard to imagine governments that have trouble simply making sure their employees are paid correctly taking charge of complex decisions related to medical, pharmaceutical or telecommunications research, to name just a few sectors, governments find themselves making such decisions when they grant subsidies.
This is the wrong way to do things. Studies demonstrate that an increase in public spending does not stimulate private spending, and even has the effect of reducing it substantially in most cases.
Public spending can create jobs in the public sector, but no sustainable employment in the private sector.
On the contrary, when the government competes less with the private sector in the recruiting of workers and the use of capital, private investment takes up the slack. It must also be noted that often, when governments get mixed up in investing in innovative projects, it is not for economic reasons, but for political, electoral ones.
If the federal government wants to promote growth and innovation in its next budget, it should remove the regulatory and fiscal hurdles that are a drag on investment and allow companies to do the investing, rather than intervene even more. Let's face it: growth and innovation are things that happen when the government gets out of the way, not when it has its hands in every pie.
Jasmin Guénette is Vice President of the Montreal Economic Institute. The views reflected in this op-ed are his own.
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